The Public Company Accounting Oversight Board announced a settled disciplinary order Wednesday against a partner of Grant Thornton Taiyo ASG LLC, Grant Thornton’s member firm in Japan, for his failure to properly address numerous risks of material misstatement of which he was aware in a 2010 audit of Baldwin-Japan Limited.
BJL is the Japanese subsidiary of Baldwin Technology Company, Inc., which was, at the time, a U.S. public company. According to GT Japan's audit, BJL’s net sales were included in, and material to, Baldwin's consolidated financial statements. However, Akiyo Yoshida, CPA, the partner-in-charge at GT Japan of auditing the company, did not act on known risk factors, such as an acknowledgement that BJL's president could make employees accelerate revenue recognition. GT Japan is a member of the Grant Thornton International Ltd. network of firms.
"When an auditor is confronted with multiple red flags that indicate the possibility of improperly accelerated revenue recognition, as happened here, the auditor must get to the bottom of the relevant issues," said PCAOB chairman James R. Doty in a statement.
On May 10, 2011, Baldwin announced that it was restating its financial statements due to financial irregularities at BJL, resulting in the premature recognition of revenue for equipment sales.
The PCAOB’s order suspends Yoshida from associating with a registered public accounting firm for one year and limits the activities that he may perform in connection with public company audits for an additional year.
The order also censures him and requires him to complete professional education courses related to public company audits. Yoshida consented to the order without admitting or denying the findings.
According to the order, Yoshida ignored or failed to evaluate properly numerous red flags that should have alerted him to the possibility that BJL was improperly accelerating revenue recognition for equipment sales.
These red flags included a 40 percent error rate in the results of end-of-year sales cutoff testing, and BJL recording all material sales for the last month of the fiscal year on the last day of that year.
Yoshida did not understand that late-entered transactions occurring at the end of a fiscal reporting period constituted a fraud risk. As a result, and despite his awareness of these red flags, and numerous other red flags related to revenue, Yoshida failed to consider whether to change the nature, timing, and extent of his audit procedures.
“Revenue often is a key metric for public company investors and is a financial reporting area prone to manipulation by management,” said Claudius B. Modesti, director of PCAOB Enforcement and Investigations. “Investors rightly expect the PCAOB to hold both foreign and domestic auditors accountable when they fail to meet PCAOB auditing standards.”
Yoshida also failed to supervise properly the members of his engagement team, according to the order. Finally, the order states that Yoshida was not sufficiently knowledgeable in the relevant professional accounting and auditing standards, and failed to seek relevant training in order to ensure that he was technically proficient and able to perform his work.
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